Thursday, April 16, 2009

The Stardust just made a margin call to Zero Hedge. We are happy to pay up when our cynicism is proven wrong. Minutes ago Steve Sakwa did come out with an updated report on Duke Realty as expected, however he kept the company at Neutral, and in fact lowered his price target from $10 to $9/share based on, gasp, dilution. Although with the stock closing at $9.37, shouldn't that be a sell? But we are nitpicking. Hurrah for an "Improved Balance Sheet" response that does not merit a Schmidtian Sell to Buy transition.

Reducing leverage via equity offering

Like many of its peers who faces significant near-term debt maturities, DRE tapped the equity markets and sold 65.4mn shares at $7.65, thereby raising net proceeds of $479.8mn excluding the 15% greenshoe. While office and industrial fundamentals should remain weak for the next 12 to 18 months, due to the decline in GDP and drop in employment, DRE’s improved balance sheet should allow the company to weather the storm even though it dilutes the company’s long-term earnings power.

Reducing FFO, NAV, and PO

Given the dilutive impact from the equity offering, we are reducing our Normalized ’09 and ’10 FFO estimates from $1.97/$1.98 to $1.55/$1.45 as the company uses the proceeds to repay borrowings on its line of credit. In addition, our forward NAV estimate falls to $9.04 while our new price objective declines from $10 to $9. Our $9 PO assumes the stock trades at parity to our forward NAV estimate which compares to its long-term average of an 8% premium due to its small remaining funding gap and high dependence on asset sales.

Balance sheet update

The $479.8mn of net proceeds will reduce the line of credit balance from $474mn at December 31st, providing DRE with $1.3bn of availability although we assume the line is downsized when it expires in January 2011. DRE has capital needs of just over $2bn during the next four and capital sources of $1.56bn although 28% is based on planned asset sales, most of which are still in the marketing phase.

The Stardust just made a margin call to Zero Hedge. We are happy to pay up when our cynicism is proven wrong. Minutes ago Steve Sakwa did come out with an updated report on Duke Realty as expected, however he kept the company at Neutral, and in fact lowered his price target from $10 to $9/share based on, gasp, dilution. Although with the stock closing at $9.37, shouldn't that be a sell? But we are nitpicking. Hurrah for an "Improved Balance Sheet" response that does not merit a Schmidtian Sell to Buy transition.

Reducing leverage via equity offering

Like many of its peers who faces significant near-term debt maturities, DRE tapped the equity markets and sold 65.4mn shares at $7.65, thereby raising net proceeds of $479.8mn excluding the 15% greenshoe. While office and industrial fundamentals should remain weak for the next 12 to 18 months, due to the decline in GDP and drop in employment, DRE’s improved balance sheet should allow the company to weather the storm even though it dilutes the company’s long-term earnings power.

Reducing FFO, NAV, and PO

Given the dilutive impact from the equity offering, we are reducing our Normalized ’09 and ’10 FFO estimates from $1.97/$1.98 to $1.55/$1.45 as the company uses the proceeds to repay borrowings on its line of credit. In addition, our forward NAV estimate falls to $9.04 while our new price objective declines from $10 to $9. Our $9 PO assumes the stock trades at parity to our forward NAV estimate which compares to its long-term average of an 8% premium due to its small remaining funding gap and high dependence on asset sales.

Balance sheet update

The $479.8mn of net proceeds will reduce the line of credit balance from $474mn at December 31st, providing DRE with $1.3bn of availability although we assume the line is downsized when it expires in January 2011. DRE has capital needs of just over $2bn during the next four and capital sources of $1.56bn although 28% is based on planned asset sales, most of which are still in the marketing phase.